Strategy. The Fund is an actively-managed exchange-traded fund (ETF) that seeks to generate attractive current income while providing protection against rising interest rates (i.e., an interest rate hedge). The Fund invests primarily in interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. Under normal circumstances, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in income producing fixed income securities exhibiting alternative income characteristics (Alternative Fixed-Income Investments). For purposes of this policy, the Fund considers interest-only mortgage-backed securities (MBS IOs) to be Alternative Fixed-Income Investments because they are not traditional fixed-income securities (e.g., corporate bonds or municipal bonds) and, unlike traditional fixed income securities, the holders of MBS IOs are not entitled to … Show more… The Fund is an actively-managed exchange-traded fund (ETF) that seeks to generate attractive current income while providing protection against rising interest rates (i.e., an interest rate hedge). The Fund invests primarily in interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. Under normal circumstances, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in income producing fixed income securities exhibiting alternative income characteristics (Alternative Fixed-Income Investments). For purposes of this policy, the Fund considers interest-only mortgage-backed securities (MBS IOs) to be Alternative Fixed-Income Investments because they are not traditional fixed-income securities (e.g., corporate bonds or municipal bonds) and, unlike traditional fixed income securities, the holders of MBS IOs are not entitled to receive any principal payments. MBS IOs generate income by collecting and distributing interest payments from a pool of mortgages to investors (such as the Fund), without including any of the principal repayments. Mortgage-backed securities (MBS) are fixed-income instruments that represent an interest in a pool of mortgages. Stripped MBS also represent interest in a pool of mortgages, the cash flow from which has been separated into interest and principal components. MBS IOs represent the interest portion of the MBS. To provide an interest rate hedge, the Fund seeks to achieve a general duration target of approximately negative three to negative ten years (the Duration Target Range). ? Duration is a measure of the relationship between interest rates and price for a fixed income security. Positive duration refers to a relationship whereby prices decline as interest rates rise, while negative duration refers to a relationship whereby prices increase as interest rates rise. MBS IOs typically exhibit negative duration. ? In the Duration Target Range, the market value of the Funds holdings is projected to increase as interest rates rise, which provides protection against falling valuations of most fixed income instruments. In general, at the low end of the Duration Target Range (i.e., negative 3 years), a one basis point (0.01%) increase in interest rates would lead to an approximately three basis point increase in the portfolios value, while a one basis point decrease in interest rates would cause an approximately three basis point decrease in the portfolios value. Similarly, at the high end of the Duration Target Range (i.e., negative 10 years), a one basis point (0.01%) increase in interest rates would lead to an approximately ten basis point increase in the portfolios value, while a one basis point decrease in interest rates would cause an approximately ten basis point decrease in the portfolios value. MBS IOs may benefit when interest rates are rising as the rate at which borrowers prepay or refinance their mortgages tends to decrease. During a rising interest rate environment, income from MBS IOs may remain steadier when compared to flat or falling interest rate environments. Further, in a rising interest rate environment, the market value of MBS IOs may increase due to slower prepayments and, as a result, interest cash flows received by MBS IOs on the aggregate mortgage principal balance generally decline more slowly. Conversely, when interest rates are falling, the rate at which borrowers prepay or refinance their mortgages tends to increase. As a result, the income from MBS IOs may decline and the market value of MBS IOs may decrease, which will result in a decline in MBS IO valuations. The Funds portfolio is structured such that a potential decline in MBS IO valuations may be partially offset by gains in the Funds U.S. Treasury positions, which have a positive duration, as discussed further below. In this scenario, the Funds portfolio will likely be rebalanced to bring the overall duration in line with the Duration Target Range, which will generally involve selling the U.S. Treasury positions and increasing the Funds holdings of MBS IOs. The Fund intends to invest solely in MBS IOs that are issued or guaranteed by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Administration (Ginnie Mae). These securities are referred to as agency MBS. Ginnie Mae securities and are backed by the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac securities are guaranteed as to payment of principal and interest by Fannie Mae and Freddie Mac, that are in turn backed by a line of credit with the U.S. Treasury. It should be noted, however, that in the case of MBS IOs, a default by an underlying borrower, will have the same effect as a voluntary prepayment (i.e., it will reduce the balance of the underlying mortgage pool, thereby reducing the market value of the MBS IO, notwithstanding such guarantee). The Funds investment sub-adviser (FolioBeyond or the Sub-Adviser) will determine the Funds overall asset allocation of the portfolio by analyzing the relative value of MBS IOs and constructing a core portfolio of MBS IOs with various coupon payments and other loan attributes. These loan attributes will include geography, loan purpose (purchase or refinancing), and loan size, among other factors that the Sub-Adviser analyzes as the most favorable to protect against rising interest rates. FolioBeyond will utilize U.S. Treasury securities, through either direct investment or through investments in ETFs, to rebalance the Funds portfolio to protect against falling interest rates by providing some offsetting positive duration to the portfolio, as U.S. Treasury holdings with a positive duration will offset the negative duration of MBS IO holdings. Generally, the MBS IO portion of the Funds portfolio is likely to have negative duration exceeding -10 years while the positive duration of the Funds U.S. Treasury holdings will have the effect of bringing the Funds overall portfolio duration to be less negative (e.g., a certain percentage of the Funds portfolio with -15 year duration MBS IO portfolio holdings can be combined with a percentage of the Funds portfolio with +10 year duration Treasury bonds to achieve the Target Duration of -10 years). The allocation ratio between MBS IOs and U.S. Treasuries will vary depending on relative value relationships, including historical yield levels compared to other financial assets, volatility and other risk measures (as determined by the Sub-Adviser), macro-environment determinants, such as inflation and economic growth, and other factors that FolioBeyond evaluates to be relevant. To achieve its Duration Target Range, the Fund may also invest, to a lesser extent, in MBS coupon swaps and MBS inverse IOs (Inverse IOs). The Fund may also purchase options on bonds or swaps to mitigate the risk of downward movement in interest rates. MBS coupon swaps are transactions that involve the sale of one MBS and the simultaneous purchase of another MBS, which may be with different agencies and have different coupon payments. MBS inverse IOs are also funded through interest only payments, however, an inverse IO is a leveraged position and the payment received is adjusted based on the current level of a floating interest rate. Inverse IOs are created from a structured collateralized mortgage obligation (CMO) where the coupon formula is determined based on the difference between the underlying CMO tranche coupon and a floating rate (e.g., 1-month LIBOR), subject to a floor. The resulting coupon payment is based on the principal balance of the underlying CMO tranche. An Inverse IO, therefore, will exhibit a combination of its coupon rate declining as short-term interest rates rise (and vice versa for falling short-term interest rates) along with sensitivity to prepayments as the present value of interest cash flows will increase as prepayments decline (and vice versa for rising prepayment rates). Since both prepayment and yield curve components increase the risk of Inverse IOs, they will be utilized infrequently and only when valuations are determined by the Sub-Adviser to be attractive. An option on a bond or swap gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing value of the underlying bond or swap is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The Sub-Adviser performs both top-down and security-specific analysis. The Sub-Adviser makes buy and sell decisions for the Fund based on a multi-factor optimization model that provides broad asset allocation guidance while specific bond analysis will be performed for security selection. Rebalancing of the MBS IOs portion of the portfolio will generally be less frequent while the U.S. Treasury portion will be more actively rebalanced as required, depending on changes in interest rates. Show less